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Vodafone’s Red Hot leasing scheme: No need for Jedi mind tricks

Vodafone has become the latest UK operator to jump onto the handset leasing bandwagon, with its new Vodafone Red Hot tariff. Similar to O2 Lease, which launched late last year, the scheme allows customers to rent top-of-the-line handsets for a term of 12 months, at the end of which they return the phone, swap it for the latest model and take out a new contract. Also like O2 Lease, Vodafone Red Hot comes with insurance bundled into the monthly price, which is key, since customers returning a damaged handset at the end of the contract will be charged a fee.

Vodafone will, of course, be hoping that Red Hot does better than O2 Lease, which launched to some fanfare and then quietly disappeared into the wasteland of business-only offerings. Some features of Red Hot seem more encouraging at first glance, however. For one thing, the range of phones on offer is better: Red Hot customers can choose between the iPhone 5, the Samsung Galaxy SIII or the Samsung Galaxy Note II, whereas O2 Lease still only offers the iPhone. In retrospect, only offering the iPhone seems a misjudgement of the market, when you consider that Android is the dominant OS in the UK, and that since launch the Galaxy SIII has outsold the iPhone 4S.

The other point in Vodafone’s favor is the price. Although we determined back in January that a 12-month contract on O2 Lease wasn’t as expensive as getting a 24-month contract with a subsidized phone, £55 per month for a 16GB iPhone 4S was still pretty steep. Vodafone Red Hot starts at £47 for the 16GB Galaxy SIII, and prices rise quickly as you select better phones; but it offers much more data than O2 Lease did at launch (2GB versus 500MB), as well as unlimited calling and texts.

So the question is, will it fly?

One of the objections to O2 Lease applies to Vodafone Red Hot, namely that the customer doesn’t own the handset. For good or ill, UK consumers expect to buy their phones outright and sell them at the end of their contract; top phones like Red Hot is offering command resale prices of around £200 or more.

But Vodafone, like its competitors, is trying to decouple ever-increasing handset costs from service plans; its options are either rental schemes, like Vodafone Red Hot, or financing schemes similar to what it introduced in Spain. As handset prices grow and regulators insist on shorter contract lock-in periods (as in Denmark or Belgium), what’s at stake is operators’ very presence in the handset retail sector.

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